“Petitioners’ Form 1040 for 2011 also included a Form 8863, which reported qualified expenses for each of J.G., G.G., and E.G. (another dependent child of petitioners). G.G. and J.G. each completed his or her undergraduate degree in the spring term of 2011. Petitioners’ 2011 Form 8863 reports a tentative AOC of $2,500 per child, or $7,500, and a refundable AOC of $3,000 ($7,500 x 40%). The $3,000 refundable AOC also appears on line 66 of petitioners’ 2011 Form 1040.

“Part IV of petitioners’ 2011 Form 8863 is incomplete. It reports on line 15 the $4,500 difference between the total AOC claimed and the $3,000 refundable portion of the credit, but that difference is not carried to either line 23 of the Form 8863 (nonrefundable education credits) or line 49 of petitioners’ Form 1040.

“Petitioners’ 2011 Form 8863 provided no facts related to the claimed credit other than the qualified expenses attributable to each child.” 149 T. C. 19, at p. 4.

On the trial, Jim concedes the whole $7500 AOC, but doesn’t explain why. Doing the numbers, IRS asserts a $7500 deficiency, but Jim and Sarah claim $6,984, because they take the tax shown on their form and give back the $3K refundable AOC.

So this is a fight about $516.

“Respondent’s position rests on the premise that the excess of the tax shown on a taxpayer’s return over any rebates made can be a negative amount that increases the taxpayer’s deficiency when the amount of the rebate exceeds the amount of tax shown. (Because the excess of the tax shown on the return over rebates is subtracted from the tax imposed to arrive at the taxpayer’s deficiency, if that excess is a negative number, subtracting it from the tax imposed will increase the taxpayer’s deficiency.)

“In normal parlance, one might say that if amount B is larger than amount A, then A does not exceed B by any amount–that is, the excess of A over B is zero. Nonetheless, it ‘is both linguistically and mathematically possible’ for the excess of a smaller number over a larger one to be a negative amount. Indianapolis Life Ins. Co. v. United States, 115 F.3d 430, 435 (7th Cir. 1997). Moreover, as respondent observes, in applying the statutory formula provided in section 6211(a) for determining a deficiency, we have implicitly accepted the premise that the excess of the tax shown on a return over rebates can be negative.” 149 T. C. 19, at p. 9. (Citations omitted).

The idea is to allow petitioners to contest denial of refundables. But of course, if the refundables are successfully disallowed, the deficiency is greater. And that’s what happens here.

Jim and Sarah get the 20% substantial understatement of tax chop. Their concession that they had no entitlement to the AOC, without explaining why they thought they had it when they filed their erroneous return, rules out good faith.

An author, teacher, advocate and trusted advisor, Lew Taishoff is a New York City-based attorney with 52 years of experience in corporate and individual tax and real estate matters. He is an Enrolled Agent, examined and admitted to practice before the Internal Revenue Service, and admitted to practice before the ... Continue reading →